Apple’s iPhone 5 is not yet officially on sale in China. But within five hours of it becoming available in Hong Kong, the Chinese “grey market” was heating-up with sales of the handsets that were supposedly smuggled across the border. This kind of demand, especially in a place wherecounterfeit luxury goods are easy to come by, has led to the assumption that prospects for parts of the Chinese consumer market remain strong despite rapidly-slowing growth in the overall economy. Gauging the strength and willingness of the Chinese consumer on the movement of Apple products, however, is a misleading play; the company is proving to be very much an outlier. It is actually another globally-recognized brand—Nike—that more accurately reflects consumer sentiment and behavior. And, if some of Nike’s latest news is any indication, the outlook isn’t as promising as Western companies have been hoping for, believing in, and banking on the past several years.
Analysis of Nike’s most recent quarterly gross profit details an 8% increase year-over-year, which signals that there is a demand for company-branded products. But a further read into the report shows that Nike experienced its second-straight quarter of declining net income. This is being attributed to factors including larger inventories, increased expenses around marketing (especially for the Olympics and European Football Championships), and investments in direct-to-consumer initiatives. In one way, these can be explained as the costs of doing business today in the interest of tomorrow. What doesn’t fall into that category, though, are two other factors being acknowledged by executives: the rising costs of manufacturing products and a slowdown in China. Between the two, the latter is far more alarming.
The transformations in China are disconcerting not only because of the rapid deceleration of the broader economy, but also because the same thing is said to be happening in the athletic footwear and apparel market. Nike began expanding its operational reach in China about 30 years ago, ahead of many of the glut of Western brands that flooded the big cities in line with a rising middle class and consumer culture. Still, Nike has continued facing competition from well-established international brands, like Adidas, and domestic movers, primarily Li-Ning. It is now entirely possible that there is an over-saturation of brands in that space—which says a great deal for a culture that has become enormously brand-conscious over the past 20 years.
What Nike does in terms of its China strategy remains to be seen. But whatever the response, it’s likely to continue making the company a bellwether of reality and not history.
